February 13, 2017
May we be controversial for a moment? Well, whatever you say, we’re afraid we’re going to have to do it anyway. So, here we go. Credit cards are a good idea. Scrap that. They’re a great idea. Well, we think so, anyway. Here’s the thing.
We’re taught to fear them. From an early age, we’re told that credit cards are a bad idea, and that we’re bound to misuse them, get ourselves into debt, make our lives a misery, and end up in the workhouse, snivelling into our gruel. Of course, if misused credit cards can be very dangerous – but there are two sides to every story. So, why are we fans? Read on.
It’s vital that you understand that they’re not offering you free money. But if you pay them back in time they are a free loan and if used properly and given a healthy dollop of respect, credit cards are a wonder. You can protect your online purchases, and ensure you’re covered if you’re a victim of fraud. Very importantly, smart credit card usage boosts your credit rating, which means that you’ll get better deals on loans, phone contracts, and a mortgage.
Many cards offer benefits such as free travel insurance, Air Miles, cashback on purchases, and gadget insurance. Plus, they can get you out of a bind if you find yourself miles from home and you’ve only got your credit card on you.
If you treat credit cards with the respect they deserve, they open up a whole new world of financial freedom. The way they’re portrayed is often pretty undeserved – millions of people use their cards every month and reap the benefits. You can easily become one of them as long as you automate fully repaying the balance every month.
Natasha Dawn and her husband were stung by credit card nearly ten years ago. “In 2007, I had loads of credit cards from the good old days of the 90s, when banks gave them out like penny chews,” Natasha says. “Tom was 22 and had never had one, and had just left university. I signed him on to my main card, with the understanding that it was for emergencies. I didn’t explain about charges or interest, as I thought he’d already know. Mistake.”
Natasha’s next bill was over £2,500. Tom, not being aware of the extra charges, had been using it to take money out – racking up huge costs. “He was using it like a 'free' cash machine, unaware of the charges - or even that the debt would have interest,” she says. “The day after I received the bill, I cut up his card and I put myself in charge of making sure we paid off the debt by prioritising it over the next six months.”
Natasha has organised their finances and bill payments for the last nine years. “We both have credit cards now, but only spend on them for big purchases, for payment protection. What can I say? We definitely learned our lesson – and Tom won’t abuse his credit card again.”
Alastair Douglas, CEO at TotallyMoney.com, is a fan of credit cards – but he believes that they have to be used sensibly, and with a long-term plan in mind.
“Credit cards provide a simple, flexible way for people to manage their monthly cashflow,” he says. “They are a first step to building a good credit history and demonstrating to lenders that you can borrow and repay sensibly and reliably. The better your credit history, the more deals, the lower the rates and the longer the introductory offers that you’re likely to be offered, be that on mortgages, car finance or other loans. It really does pay to take that first step and check to see which credit cards you could be eligible for.” Sounds like good news to us.
Alastair is also a big believer in the safety that buying with credit cards affords consumers. “When you add in the benefits of consumer protection – which is standard on all credit cards - and identity theft cover, which can protect you against identity theft and stop someone else running up a huge bill in your name, a credit card is a great addition to any wallet,” he says. “The consumer protection offered by section 75 for purchases of more than £100 made on a credit card is a fantastic benefit, especially as increasing numbers of purchases are being made online. There’s also no cheaper way to borrow money - with 0% purchase introductory offers of over two years, a credit card can make paying for expensive, budgeted purchases easy to manage.”
He also refuses to believe that credit cards are ‘bad’, and dismisses the notion that they’re a one-way street to financial ruin. “The idea that credit cards are ‘morally wrong’ is a bit of an outdated view now,” he continues. “More and more people recognise that there is nothing fundamentally wrong with borrowing, and many enjoy the financial independence that responsible credit card use brings. There’s no reason spending on a credit card should be any more ‘risky’ than spending with a debit card; it is simple to set up a direct debit to ensure that you never miss a payment, and many cards offer online account management to help you stick to your credit limit.
“The benefits far outweigh the negatives, if used sensibly. Most credit cards give you up to 56 days of interest-free credit, which is useful for bridging short-term, ready cash shortfalls. If you pay off the balance in full each month, you can borrow up to your credit limit at no cost. And if you do repay your balance in full each month, rewards cards that offer cashback or Avios could mean that you earn when you spend.”
Alastair’s personal experience of using credit cards has been positive – he loves the benefits of having a card, and made sure to maximise them. “It’s the rewards that I’ve taken advantage of most,” he says. “I put all of my spending on my credit card, and I do mean everything, from a pint of milk to train tickets, to a new TV. I earned enough Avios points for a trip to Barcelona!”
Personal finance blogger Erin from Broke Millennial rates credit cards – but only if they’re used sensibly. “I personally believe credit cards are a powerful tool, if you use them correctly,” she says. “It's the easiest way to build a credit history and score without paying a penny in interest. Take out a card, use 30% or less of the available credit limit and pay it off on time and in full each month.”
If you’d like to look at getting your first card, Erin has some great advice – especially if you’re feeling a bit timid! “Don't focus on rewards or bonus offers,” she continues. “Just get a plain vanilla, no annual fee credit card and then use it to just pay one small bill each month, like your Netflix account. You can even automate the bill to get paid so you're sure it's always paid on time and in full.”
Erin thinks that credit cards are a force for good – but that they shouldn’t be used to fund your lifestyle, if you’re having a few issues financing your fun. “If you can't pay for your lifestyle with the funds in your bank account, then it's time to re-evaluate,” she suggests. “When it comes to horror stories, luckily, I don’t have any personal experience. I've only read articles and heard urban legends about ballooning credit card debt. I do have friends who carry a few thousand in debt; nothing terribly unmanageable. It’s often the result of a necessary car repair, or some unforeseen expense - which is why it's so important to have an emergency fund!”
Like Natasha’s story? Agree or disagree with Alastair and Erin? There’s far more to come – so watch this space to see more real-life stories and expert analysis.
This summer, we’re on a mission to take the temperature of the UK, and find out what people really think about credit cards. We’ll be adding more to our report soon – but in the meantime, we’d love to know what you think.
What's your experience of credit cards been? Have you been stung by them and put off for life, or have you always found them a handy ally? We'd really like to know your stories, good and bad. Tweet us @TheLifehouseCo, find us on Facebook or contact us here.
Oh, before we forget - we wrote something brilliant and oh-so-readable on the 10 commandments of credit cards. We think you'll love it, so give it a go.